Normal goods refer to those goods that share positive relationship with the income of the consumers. That is, when the consumers’ income rise (or fall), then the demand for the normal goods also rises (or falls). The effect of change in the consumers’ income on the demand of the normal goods is explained below diagrammatically.
In the diagram, D1D1 represents
initial demand curve and S1S1 represents initial supply curve. E1 is the initial equilibrium, where D1D1and S1S1 curves intersect. OP1 is the initial equilibrium price and Oq1 is the initial equilibrium quantity.
Now, with a fall in the consumers’
income, the market demand for the normal goods fall. This is shown by the leftwards parallel shift of the curve to D2D2. At the initial price OP1, there exist excess supply equivalent to
units (i.e.
). Due to the excess supply, competition among the producers increases as they try to get rid of the excess stock by selling their output at lower prices. The price will continue to fall until it reaches OP2,where, the new equilibrium is attained at point E2. At this
new equilibrium, the new demand curve D2D2 intersects the initial market supply curve S1S1. A comparison of the final equilibrium with the initial equilibrium indicates that due to the fall in the consumers’ income, both the equilibrium price as well as the equilibrium quantity has fallen.
Conclusion
Fall in Income ⇒ Decrease in
Demand ⇒ Excess Supply at the existing price ⇒ Competition among the Producers Increases ⇒ Price Falls ⇒ New Equilibrium is attained ⇒ Reduced Equilibrium Quantity Demanded and Equilibrium Price
How is the equilibrium price in equilibrium quantity of a normal commodity affected by an increase in the income of its buyer?
Increase in price leads to rise in supply and fall in demand and these changes continue till supply and demand become equal at a new equilibrium price so if there is an increase in demand only, equilibrium prices rises.
How does change in the income of the buyer of a commodity affect its demand explain?
Understanding the Income Effect
For normal economic goods, when real consumer income rises, consumers will demand a greater quantity of goods for purchase. The income effect and substitution effect are related economic concepts in consumer choice theory.
How is the equilibrium price and equilibrium quantity of a normal commodity affected by an increase in the income of the buyer explain with the help of a diagram?
1 Answer. An increase in income of the consumer leads to increase in demand for the commodity or a rightwards shift in the demand curve. The increase in demand leads to competition among buyers causing a push in the market price.
What effects on buyers does a change in price from equilibrium have?
Just as a price above the equilibrium price will cause a surplus, a price below equilibrium will cause a shortage. A shortage is the amount by which the quantity demanded exceeds the quantity supplied at the current price.